The iShares MSCI Qatar Capped ETF: The Pearl Of The Arabian Peninsula

| About: iShares MSCI (QAT)

Summary

Nearly every holding is partly or majority owned by Qatar’s sovereign wealth fund.

A main objective of the Qatar Central Bank is to support the economy to counter financial disturbances.

The fund’s banking sector contains the largest international retail Sharia compliant banks.

Qatar was once best known for its exquisite pearls. It was a famous export dating back to the Golden Age of Islam. Merchant vessels from China and India would weigh anchor near Doha and trade their very best in exchange for Qatari pearls. Today, archaeologist often find precious artifacts of fine porcelain, coins, gold and silver jewelry which embarked from distant Asia, South Asia and Africa centuries ago. That was, of course, at a time when petroleum was nothing but a nuisance which bubbled up from the sand in places and best used to plug seams between the planks of wooden sailing ships. Up until the mid-19th century in the west, whale oil was the main type of oil in use. As supplies dwindled due to over hunting, industrialist searched for substitutes. Kerosene was one of the earliest mass produced distillates from petroleum. Other petroleum distillates, like gasoline, were considered a waste product and discarded. The real tipping point for petroleum came with the invention of the internal combustion engine which demanded precisely that more volatile petroleum derivative: gasoline. Demand for distillates took off as the First World War turned the internal combustion engine into a weapon of war. By the end of the war it had become clear that petroleum would be a vital strategic resource and the search was on for the location of petroleum reserves. During the war, a British army officer and mining engineer, Frank Holmes, had heard rumors of petroleum bubbling to the surface in the Arabian Peninsula and reasoned that the region might have large reserves. After the war, Holmes met with the patriarch of the third Saudi dynasty, King Abdul-Aziz ibn Abd al-Rahman Al Saud, and obtained search rights from the king. The growing competition for searching out Arabian oil fields was becoming fierce. When the Anglo-Persian Oil Company got wind that Holmes had been searching in Qatar they sent emissaries and managed to gain concessions from Sheikh Abdullah of Qatar. (Holmes, always a step ahead, had moved on to Kuwait by then).

Although the First World War spelled the end for most European ruling dynasties, it also marked the end of the centuries old Ottoman Empire. The Armistice of Mudros resulted in the partitioning of the now defunct empire. Qatar became a British protectorate under the rule of Sheikh Abdullah bin Jassim Al Thani. However, it wasn't until 1939 that petroleum reserves were discovered on the Qatari Peninsula and those reserves wouldn't be exploited until after the Second World War.

Half a century of warfare was costly for the United Kingdom. The empire began to gradually dissolve and British influence waned in the Gulf States. Qatar became a fully independent state on September 3, 1971. Within a year, the nation was fully reorganized under the leadership of Khalifa bin Hamad Al Thani. During this time, the Qatar General Petroleum Corporation consolidated the nation's oil operations and Qatar was well on its way towards becoming the wealthiest nation on earth.

Data from World Bank

Data from World Bank

According to the U.S. EIA Qatar Energy Data and Analysis Qatar's hydrocarbon industry accounts for 49% of government revenues. Crude petroleum is a large part of those exports, but Qatar's main hydrocarbon export is, by far, liquefied natural gas (LNG) commanding 31% of global market share, fourth behind the U.S., Russia and Iran. Qatar also boasts the world's largest gas-to-liquid refining facility. Since Qatar's production well exceeds domestic demand, almost all gas condensates are destined for the export market. Relative to the other OPEC members, crude petroleum production at about 1.5 million barrels per day is among the very least of the all OPEC member production. The main point is that Qatar is more of a petroleum distillate or condensate product exporter far more than it is an exporter of crude petroleum, for which there currently is ample global supply.

Clearly, Qatar is still a 'petro-state', with 92% of its exports being petroleum gas, crude petroleum and refined petroleum products. Nearly 85% of these exports are destined for the top ten trading partners.

Data from OEC

The pie chart demonstrates the risk to the Qatari economy. Almost half, 47.95%, of its exports, which are petroleum related products are destined for 5 economies which have been affected by the economic contraction in the Asia-Pacific region; the remainder is destined for Europe. Although energy demand in Europe may be recovering, price competition and geography may make it more efficient for European petroleum importing nations to source hydrocarbon energy supplies locally, for instance, the U.K., Norway or Russia. Aside from having oil reserves, the Scandinavian countries have ample refining capacity. The question then becomes whether Qatar's sovereign wealth reserves can sustain the mostly state supported system until demand recovers. It should be noted that among the many objectives of the Qatar Central Bank, is to

...Take the necessary measures to counter global, regional and local, economic and financial disturbances in coordination with the ministry...

Hence it's reasonable to assume that Qatar has set aside ample reserves for just such conditions.

Having a basic background on Qatar, the investor may be inclined to ask if there's a way to invest in Qatar through an ETF, and indeed, there's one primary Qatar focused ETF in the BlackRock (NYSE:BLK) portfolio of single country focused ETFs, namely, iShares MSCI Qatar Capped ETF (NASDAQ:QAT).

The fund is relatively new, and began trading about the same time petroleum prices began to decline, April 2014. Unlike other iShares funds, the expense ratio is a bit high at 0.64%. The fund had 2.4 million shares outstanding and has decent trading volume averaging about 5300 shares per day over the last three months and about 9300 over the past 20 days. It's small with only 29 holdings and net assets of $39,000,000. The fund's P/E is below the S&P at 13.10 and trades at just under two times book; it isn't volatile with a beta of 0.32 times the market. The most interesting thing to note is the funds 12 month trailing yield of 4.50% which works out to 4.34% after fees (SEC yield). The fund is currently trading at a premium of 0.24% of its net asset value. Lastly, with one or two exceptions these companies list on the Qatari exchange. Hence, the only way to in this economy is through the fund.

Data from BlackRock

Clearly, the fund is heavily weight in financials. A little background is needed here, too. The Qatari financial sector is reasonably stable. The banks were less impacted by the global credit crises of 2008 than most globally. Over the years since, the private banking sector has been actively pursuing consolidation through merges and acquisitions. However, perhaps because of the dramatic contraction of oil prices and increase Qatar Central Bank reserve requirements, banks have been lending less. Hence, the banking sector isn't weak, by a long shot. Rather it seems that profits may decline due to a commodities related slowdown in business activity, which happens to be affecting the global economy.

Financials 62.315

Fund Weight

Ticker

Market Cap (billions USD)

P/E

Yield

Dividend/EPS

Total Debt/Equity

Qatar National Bank

20.1346%

Cairo: QNBK

$29.216

9.44

4.93%

21.739

51.49%

Masraf Al Rayan QSC

8.4728%

Qatar: MARK

$6.696

11.76

5.38%

65.77

44.28%

Ezdan Holding Group

6.4761%

Qatar: ERES

$8.694

21.07

3.21%

67.797

38.49%

Qatar Insurance Co.

4.6879%

Qatar: QINS

$3.752

19.71

2.94%

57.938

72.96%

Commercial Bank QSC (fmr. of Qatar)

4.3662%

OTC: CBQRL

$3.6068

7.86

7.91%

62.23

132.94%

Qatar Islamic Bank SAQ

3.8769%

Qatar: QIBK

$5.3594

9.97

5.15%

42.19

51.391%

Doha Bank QSC

3.7637%

Qatar: DHBK

$2.579

7.57

11.00%

83.33

26.09%

Barwa Real Estate Co. QSC

2.8058%

Qatar: BRES

$3.2964

2.11

2.20%

12.90

42.23%

Qatar International Islamic Bank QSC (also as QIIB QSC)

2.2804%

Qatar: QIIK

$2.5767

10.94

6.45%

70.67

12.487%

United Development Co. PSC

1.6537%

Qatar: UDCD

$1.751

9.63

6.94%

66.845

41.03%

Al Khalij Commercial Bank-Al Khali

1.0098%

Qatar: KCBK

$1.661

9.67

5.95%

57.47

50.27%

Salam International Investment

0.9377%

Qatar: SIIS

$0.313

14.95

6.00%

89.55

114.74%

Qatar Industrial Manufacturing

0.7899%

Qatar: QIMC

$0.484

11.42

8.09%

92.308

2.24%

Mazaya Qatar Real Estate Development

0.6139%

Qatar: MRDS

$0.343

7.18

2.40%

17.47

32.48%

National Leasing (Alijrah Holding Co QSC)

0.4398%

Qatar: NLCS

$0.159

NMF

7.26%

NMF

10.34%

Averages

4.15%

$4.70

10.948

5.72%

60.8259

48.23%

Click to enlarge

Data from Reuters Africa, Yahoo Finance, company websites and other sources

Of the financial holdings, Qatar National Bank SAQ dominates financial allocations at 20.1346%. QNB is the second largest bank in the region. Most recently QNB agreed to purchase the Turkish operations of the National Bank of Greece (OTCPK:NBGIF). It should be noted that QNB is about half state owned through the national sovereign wealth fund. Another very important point to consider is that this particular allocation of mostly international banks concerns itself with Islamic Banking. For example, the parent company of Masraf Al Rayan bank QSC is the largest Sharia compliant retail bank in the United Kingdom. As global demographics change, the need for Sharia compliant banking will be a growing need on every continent for decades to come.

In spite of its name Qatar Industrial Manufacturing Corp is a financial development company, investing and providing capital needs for industries within the Gulf Cooperation Council (GCC) economic region. Like most Qatari companies, particularly in the financial sector, QIM is partially state owned through the nation's sovereign wealth fund. It should be noted that the resources available to Qatari government-private partnerships create a solid foundation for the sector. The combined sector allocation average yield is 5.72%; dividends average approximately 60% of EPS.

Industrials 14.56%

Fund Weight

Ticker

Market Cap (billions USD)

P/E

Yield

Dividend/EPS

Total Debt/Equity

Industries Qatar

10.4586%

Qatar: IQCD

$15.788

10.54

7.37%

77.69

4.95

Qatar Navigation

3.6462%

Qatar: QNNC

$2.775

8.44

6.24%

52.632

34.23

Mannai Corporation Ord

0.4519%

Qatar: MCCS

$1.5265

7.25

7.14%

51.769

137.30

Averages

4.85%

$6.70

8.743

6.92%

60.69

58.83

Click to enlarge

Data from Reuters Africa, Yahoo Finance, company websites and other sources

The Industrials are dominated by Industries Qatar. As one might expect the company is mostly a petrochemical refiner, producing various chemicals as well as fertilizer. The company also has a steel production unit. Mannai Corp is one of the oldest established companies in Qatar and not directly involved in petrochemicals. It main business is diversified: auto and heavy equipment sales, rental and service as well as medical equipment, IT services and home appliances.

Telecom Services 8.04%

Fund Weight

Ticker

Market Cap (billions USD)

P/E

Yield

Dividend/EPS

Total Debt/Equity

Ooredoo

4.8378%

n/a

$6.476

13.00

5.43%

70.67

187.29

Vodafone Qatar

3.2009%

Qatar: VFGS

$2.419

NMF

2.02%

NMF

16.33

Averages

4.02%

$4.45

6.5

3.725%

35.335

101.81

Click to enlarge

Data from Reuters Africa, Yahoo Finance, company websites and other sources

One of the two telecom holdings is a subsidiary of Vodafone (NASDAQ:VOD). On the other, hand Ooredoo is the descendant of the state owned Qatar National Telephone Service and provides the full line of telecom services, broadband and wireless in the GCC region as well as the Middle East and North Africa.

Energy 5.90%

Fund Weight

Ticker

Market Cap (billions USD)

P/E

Yield

Dividend/EPS

Total Debt/Equity

Qatar Transport Company Ltd

4.0099%

Qatar: QGTS

$3.007

11.39

6.07%

69.36

604.94

Gulf International Services

1.8871%

Qatar: GISS

$2.118

5.32

13.25%

70.42

116.20

Averages

2.95%

$2.563

8.355

9.66%

69.89

360.57

Click to enlarge

Data from Reuters Africa, Yahoo Finance, company websites and other sources

The energy sector contains only two holdings and comprises about 6% of total fund holdings. As the sector most sensitive to the demand for petroleum products, having few energy holdings is an advantage to the fund. As noted, the Qatari sovereign wealth fund invests in these holdings, which helps cushion the blow from falling commodity prices. At this point keep in mind that the fund's main weight is in financials, also partnered with the state. This is a key point: this fund should hold up well in spite of the decline in commodity prices. Like any investment, there's risk, but in this case, the risk exposure to the oil sector is mitigated by the fund's construction and private-public partnerships.

Utilities 4.47%

Fund Weight

Ticker

Market Cap (billions USD)

P/E

Yield

Dividend/EPS

Total Debt/Equity

Qatar Electricity & Water Co. QSC

4.4727%

Qatar: QEWS

$5.400

13.10

4.10%

54.945

74.39

Click to enlarge

Data from Reuters Africa, Yahoo Finance, company websites and other sources

Qatar Electricity and Water is also a public-private venture, the state sovereign wealth fund owning over 50%; the yield is 4.10%. It should be noted that with Qatar's abundant energy resources, the company is perfectly suited for the energy intensive desalination facility which it operates.

Materials 2.326%

Fund Weight

Ticker

Market Cap (billions USD)

P/E

Yield

Dividend/EPS

Total Debt/Equity

Qatar National Cement

1.4064%

Qatar: QNCD

$1.34

10.54

4.02%

41.934

0.22

Qatari Investors Group

0.9196%

Qatar: QIGD

$0.854

12.99

3.00%

39.06

65.43

Averages

1.16%

$1.097

11.765

3.51%

40.497

32.825

Click to enlarge

Data from Reuters Africa, Yahoo Finance, company websites and other sources

Qatari Investors Group is one of those companies that are so diverse, it's difficult to classify. Its business operations are Industrial, Engineering, Cement, Real Estate, Marine and Aviation. So although it produces materials, i.e., cement, it's more of a diversified industrial.

Consumer Staples 1.11%

Fund Weight

Ticker

Market Cap (billions USD)

P/E

Yield

Dividend/EPS

Total Debt/Equity

Al Meera Consumer Goods Company

1.1074%

Qatar: MERS

$1.002

18.02

4.93%

88.933

6.28

Widam Foods

0.573%

Qatar: WDAM

$0.210

11.31

5.88%

66.489

21.95

Averages

0.8402%

$0.606

14.665

5.41%

77.71

14.115

Click to enlarge

Data from Reuters Africa, Yahoo Finance, company websites and other sources

The interesting holding is Widam Foods an international company specializing in livestock and wholesale frozen meat products. The company imports from Georgia, Australia, Brazil, Pakistan and India among others.

Health Care 0.71%

Fund Weight

Ticker

Market Cap (billions USD)

P/E

Yield

Dividend/EPS

Total Debt/Equity

Medicare Group

0.7053%

Qatar: MCGS

$0.6029

11.21

6.41%

71.834

0.00

Click to enlarge

Data from Reuters Africa, Yahoo Finance, company websites and other sources

Qatar is wealthy enough to provide high quality healthcare services for its nearly two million citizens. Medicare Group is essentially a hospital holding group providing the full spectrum of health care services, in particular, the specialized Al-Ahli Hospital in Doha.

As noted, few of the 29 holdings have listing outside of the Qatar stock exchange. A few list on the Cairo exchange and only two on OTC exchanges. This may be due to the fact that the holdings are public-private enterprises and not entirely free market competitors. However, this shouldn't overlook the fact that the companies here occupy a niche market in many ways, particularly in international banking. The next important consideration is the funds over 4% yield. In essence, the yield is underwritten by the Qatari sovereign wealth fund.

Qatar is probably the most open of all of the Gulf states; its capital Doha is international, diverse and cosmopolitan. Qatar strikes a fine balance of maintaining its proud and centuries old Islamic traditions and at the same time a vibrant 21st century global economy. At face value, the fund might appear to have too much of an associated petroleum commodity risk. However, that's not the case.

Hence, with a 4.34% annual distribution a small position might just prove itself to be a pearl in a diverse portfolio.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: “CFDs, spread betting and FX can result in losses exceeding your initial deposit. They are not suitable for everyone, so please ensure you understand the risks. Seek independent financial advice if necessary. Nothing in this article should be considered a personal recommendation. It does not account for your personal circumstances or appetite for risk.”

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.